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Halal Screening: How It Works

Financial Ratio Screens (AAOIFI)

9 min read Includes quiz · 2 questions

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Educational Disclaimer

This lesson is for education only. We do not give investment advice. Shares are volatile — prices go up and down and you may lose money. Always do your own research and speak to a licensed professional adviser.

Stage 2: Is the financial structure clean?

Even if a company makes halal products, its balance sheet could be problematic. A company that is heavily financed by interest-bearing debt is participating in riba — and so, indirectly, are its shareholders.

The most widely used framework in Nigeria (applied to the NGX Lotus index) follows AAOIFI Shariah Standard No. 21. It uses three key ratios, all calculated relative to the company's market capitalisation (market cap = share price × total shares outstanding):

The Three AAOIFI Screening Ratios

Ratio 1 — Debt-to-Market Cap
Total interest-bearing debt ÷ Market Capitalisation < 30%

Example: If a company has ₦3 billion in bank loans and bonds, but its market cap is ₦20 billion → 3/20 = 15%. ✅ PASSES

Ratio 2 — Interest Income-to-Total Revenue
Interest and non-compliant income ÷ Total Revenue < 5%

Example: A manufacturer earns ₦500M in interest from its bank deposits out of ₦12B total revenue → 500M/12B = 4.2%. ✅ PASSES

Ratio 3 — Accounts Receivable-to-Market Cap
(Cash + Interest-bearing receivables) ÷ Market Cap < 70%

This ensures the company's value is primarily in real, tangible assets rather than paper claims.

Why market cap, not total assets?

Using market cap (rather than total assets or book value) reflects the current market price of the company. It adjusts dynamically as the company's stock price moves. This means a company that passes one day may fail if its stock price crashes (making the debt ratio worse).

⚠️ This is why index composition is re-checked periodically — financial ratios change as share prices and balance sheets evolve.

Knowledge Check

Quick Check: Financial Ratios

2 questions · Retryable · Earn points

Question 1 / 2 +20 pts

Dangote Sugar has ₦15 billion in interest-bearing debt and a market cap of ₦60 billion. What is its debt-to-market-cap ratio as a percentage? (Enter just the number, e.g. 25)

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Question 2 / 2 +15 pts

A company earns 8% of its total revenue from interest on deposits and loans it has made. Under AAOIFI screening, this company:

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